Flavin, Thomas and Limosani, M.G.
(2007)
Fiscal, monetary policy and the conditional risk premium
in short-term interest rate differentials: an application
of Tobin’s portfolio theory.
International Review of Economics and Finance, 16.
pp. 101-112.
ISSN 1059-0560
Abstract
This paper proposes a Multivariate-Arch in Mean model to analyze the potential channels through which
domestic fiscal and monetary policy as well as changes in the international economic environment may affect
interest rate differentials across countries. This technique is illustrated by analyzing the behavior of short-term
interest rates in a number of European countries prior to the introduction of the common currency. The key
feature of our results is that macroeconomic variables exert both a direct and indirect influence on the shortterm
interest rate differential. This indirect effect is captured through the conditional volatility of the
differential, which is itself a statistically significant determinant of the level of the differential. This
relationship is likely to be overlooked by more traditional models that focus solely on the first order moments
of the process.
| Item Type: |
Article
|
| Keywords: |
Interest rate differentials; Macroeconomic effects; M-GARCH; |
| Academic Unit: |
Faculty of Social Sciences > Economics, Finance and Accounting |
| Item ID: |
8003 |
| Identification Number: |
https://doi.org/10.1016/j.iref.2004.10.006 |
| Depositing User: |
Thomas Flavin
|
| Date Deposited: |
07 Mar 2017 17:40 |
| Journal or Publication Title: |
International Review of Economics and Finance |
| Publisher: |
Elsevier |
| Refereed: |
Yes |
| URI: |
|
| Use Licence: |
This item is available under a Creative Commons Attribution Non Commercial Share Alike Licence (CC BY-NC-SA). Details of this licence are available
here |
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